The Echo Nest might be one of the few companies to have figured out how to cash in on the music business. Only it has little to do with selling music. Instead, it gives developers the tools to create the next brilliant music discovery app.

iPad screenshot of We Are Hunted's Music Hunter app

Jim Lucchese, Echo Nest’s chief executive, believes on-demand apps are the future of the music industry. They let consumers discover their next favorite band with the push of a button. Apps, he says, “are the new Tower Records or the new college radio DJs.” He wants the two-year old company, which was launched by a couple of MIT PhDs, to be the glue that connects app developers with listeners.

Echo Nest’s application programming interface, or API, compiles enormous amounts of internet data on how people are talking about music and what songs and artists are popping up on the web. It automatically analyzes everything from the beats-per-minute of 17 million tracks, to which artists are trending across hipster music blogs, to which drummer is described as “funky” the most times. It uses that data to make recommendations.

The platform is the “special sauce” that makes new app ideas possible, said Echo Nest operations director Elissa Barrett.

This heralds a new phase in the music industry’s evolution. Consumers are becoming less interested in owning music than in having access to as much of it as possible. Plus, they want to hear bands they’ve never heard. Echo Nest apps help music fans do both.

Echo Nest’s API is like steroids in the hands of developers, allowing them to create apps that they never would have had the power to pull off on their own.

We Are Hunted, an Australia-based development house with about a dozen employees, had already created innovative apps before hooking up with Echo Nest. But after the two companies met, Hunted knew it had found a worthy partner.

Hunted also ranks new music on its own site by analyzing what people are reading and saying online and what people are streaming and downloading by analyzing tens of thousands of blogs and torrent sites and millions of tweets a month. Its slick mainstream iPad app Music Hunter, produced with the Echo Nest platform, stayed in the top five of music apps in almost every country for weeks after it launched in late April.

The app is the Australians' second attempt to bust into the music app business through the Echo Nest. Its earlier effort, the Pocket Hipster app, features snarky cartoon characters who sneer at users’ music and suggest other bands. “A lot of people didn’t get the joke,” said Stephen Phillips, We Are Hunted’s chief technical officer. “People were clearly offended by a cartoon criticizing their music taste. We got a lot of angry emails from people who thought their music tastes were superior and that these cartoon characters were full of shit.”

They started with Echo Nest in October 2010 and signed a three-app deal, of which Pocket Hipster was the first. Hunted had a large audience and a savvy design team, but they were light on the technical side. Echo Nest had a powerful tech side but no audience. The partnership was natural, said Phillips. The Echo Nest makes money by taking a cut from developers’ sales.

The biggest risk of such sites is that some of them exist in a tricky legal grey area. But, Phillips said, they are all in the same boat of figuring out how to make money in music. “If you’re on the team of trying to solve this problem that everybody’s got, you’re going to be okay.”

A Scattered Industry

Echo Nest creators Brian Whitman and Tristan Jehan met in the PhD program at the MIT Media lab. The Echo Nest has been actively tracking data on the web since 2005 and has amassed acoustic data for over 10 million tracks. Pandora’s Music Genome Project has taken over 10 years to manually curate 1 million tracks.

The company works with 7,000 independent developers, as well as large companies like the BBC, MTV and MOG. So far, the company has produced 160 apps through its platform. The company would not disclose its revenue figures, though it received $7 million in second-round funding orchestrated by Matrix Partners in Oct. 2010.

Accessing licensed music can be a roadblock for developers. The Echo Nest’s partnership with Rdio, announced May 3, 2011, gives independent developers access to fully-licensed content, giving them the tools to create commercially viable apps. Consumers must subscribe to Rdio for the content, however. Other licensing partners include 7digital and Island Def Jam. These deals provide a legal way for apps to access a vast catalog.

The industry is still looking for effective ways to make money from music, and there have been many false starts. Record companies once thought ringtones would be their saviors. "Freemium" models from online music services like Pandora and Spotify are popular, but they're unproven as money makers. The music industry is looking for something - anything - with traction in this ever-shifting market.

By chasing app developers, The Echo Nest hooked into a valuable niche, said Eric Garland of Big Champagne Media, which analyzes online trends. The company has staked territory for which few others compete. “I think they made the fundamentally smart move by becoming a platform for solutions for the market of developers rather than just being focused on interior market strategy,” he said.

They’ve also latched onto a market that may be poised to dominate digital music consumption. U.S. music transactions numbered 1.5 billion in 2009, according to Neilsen. Compare that with the number of times top-charting artists’ music videos have been streamed on YouTube: 25 billion. The 200 most popular official music videos have been streamed almost 11 billion times. Streaming is becoming an essential way for people to consume music. The problem is monetizing it.

“The sector they serve is now responsible for the overwhelming majority of impressions in the online music market,” Garland said.

Though they’ve staked out unique territory, The Echo Nest exists in a fast-moving economic space where a competitor could come out of nowhere.

Also, some predict that the group of startups changing the industry will soon be swallowed by larger corporations entering the market, such as Google, Amazon and Apple, which have made moves toward a cloud-based system of digital content. Smaller companies like Facebook could make such moves, too. Still, the Echo Nest is well-positioned, Garland said.

The digital music industry is fragmented between content providers, recommendation services, license holders, etc. APIs are one possible solution. The question, says Michael Papish, product developer at Rovi Corporation, a company that specializes in APIs for the entertainment industry and sometimes competes with the Echo Nest, becomes “how do you create a single layer where all those things come together for the consumer?”

Papish has seen multitudes of startups rise and fall, largely because of fundamental problems in the music economy. If the industry isn’t making money in the first place, it becomes hard for anyone to succeed in that “ecosystem,” he said. “If Echo Nest succeeds, we all succeed, because someone has turned music into a money-making enterprise.”